2.It is 1996 (humor me). Time Warner Inc., has a beta of 1.75. Part of the reason for the high beta is the debt left over from the leveraged buyout of Time by Warner in 1989, with debt amounting to $10 billion in 1995. The market value of equity was also $10 billion in 1995. The firms marginal tax rate is 40%.

Estimate the unlevered beta for Time Warner.

Estimate the effect of reducing the debt/equity ratio (at market value) by 10% each year for the next two years on the beta of the stock.